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Daily Newsletter, Monday, 07/23/2001

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The Option Investor Newsletter Monday 07-23-2001
Copyright 2001, All rights reserved. 1 of 1
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MARKET WRAP (view in courier font for table alignment)
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07-23-2001 High Low Volume Advance/Decline
DJIA 10424.42 -152.23 10595.40 10419.71 1.03 bln 1326/1760
NASDAQ 1988.56 - 40.81 2047.85 1987.51 1.48 bln 1381/2347
S&P 100 614.41 - 11.18 628.07 614.07 totals 2707/4107
S&P 500 1191.03 - 19.82 1215.22 1190.50
RUS 2000 487.70 - 5.23 489.51 482.70
DJ TRANS 2961.81 - 3.85 2982.31 2957.00
VIX 26.13 + 1.16 26.77 24.92
Put/Call Ratio 0.45
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Caveat Emptor: You're Alone
Not even an upgrade of shares of Cisco Systems (NASDAQ:CSCO) could
embolden the buyers Monday. Maybe they're all still out on the
beaches and lakes enjoying summer. Whatever the reason, the lack
of interest on the part of the bulls left the bears control of the
market Monday. However, the 970 million shares traded on the NYSE
and the 1.3 billion shares traded on the Nasdaq are typical
trading volumes for this time of year. In a word: tepid.
Speaking of bears, they won the TECH battle last week. The Nasdaq
Composite (COMPX) finished lower by about 2 percent. The S&P 500
(SPX.X) and the Dow Jones Industrial Average (INDU), however,
finished last week fractionally lower and higher, respectively.
So can we assume that after last week's roughly 2 percent drop in
the COMPX and Monday's additional 2 percent loss that the bears
are getting greedy? I think to a certain extent, yes. To steal
a few observations from Jeffrey Cananvan recently, bears don't
like surprises and they equally dislike crowds. (Caveat Venditor:
It's growing crowded out there.) Add to the possibility that the
short side may be growing a bit crowded the fact that several key
support levels lay just beneath the COMPX. Therefore, a
short-term, tradable rally may be fast approaching in the tech
infested Nasdaq.
But, my initial bias would be to short weak Nasdaq stocks after
Monday's close below psychological support at 2000 - only the
COMPX's second close below 2000 since mid-April. But that seems
too easy. And the market is currently diametrically opposed to
easy, at least from where I sit.
Of course, the after hours earnings releases will impact the
Nasdaq Tuesday morning, but more on that later. For now, let's
turn the focus to levels. The COMPX has support just below at
the 1975 area, which is the 50 percent retracement level.
Coincidentally, the 1975 retracement level is currently
bisected by the aggressive ascending support line displayed on
the chart below. In short, the general area of 1975 should
serve as support early Tuesday, that is if the COMPX doesn't
gap below that level. If it does, 1975 will most likely morph
into resistance. Other than 1975, the COMPX has support at its
relative lows around 1960 and 1934 - both levels could serve as
profit taking points for the bears.
After the bell, there were three important earnings reports
insofar as the tech sector is concerned. AT&T (NYSE:T) reported
earnings of 4 cents per share, while consensus estimates had the
company pegged to earn 3 cents. More importantly, the company
guided third-quarter earnings lower. This is disconcerting for
those networking companies that are highly leveraged to the
telecom business, such as Tellabs (NASDAQ:TLAB), ADC Telecom
(NASDAQ:ADCT), CIENA (NASDAQ:CIEN), Comverse Technology
(NASDAQ:CMVT), Lucent (NYSE:LU) and Nortel (NYSE:NT), among
others. Keep an eye on the Networking Index (NWX.X) Tuesday
morning. At time of writing, AND PRIOR TO ITS CONFERENCE CALL,
shares of AT&T were flat in the after hours session.
Amazon.com (NASDAQ:AMZN) reported a net loss slightly smaller
than what Wall Street had been expecting. And the company
reported that AOL - Time Warner (NYSE:AOL) agreed to buy $100
million worth of stock. But, Amazon guided revenue estimates
for the second-half of the year lower. Obviously, the market
didn't take the news too well. Shares of Amazon were down by
about $1 in the after hours session at time of writing. Worth
noting, the CBOE Internet Index (INX.X) has been holding above
support at 160 recently, but that may change in the wake of
Amazon's lowered guidance.
The third big report from the tech space Monday evening was
delivered by Texas Instruments (NYSE:TXN). The chip giant
reported earnings that beat estimates by one penny. And guess
what? It completed the trifecta of lowered guidance. TI lowered
both earnings and revenue guidance for its third-quarter.
However, its warning had little impact on alike chip companies in
the after hours session. For the most part, shares of Intel
(NASDAQ:INTC), Advanced Micro (NYSE:AMD), Analog Devices
(NYSE:ADI) and National Semi (NYSE:NSM) were unchanged, although
on light trading. It remains to be seen how TI's warning impacts
the Semiconductor Sector Index (SOX.X). For its part, the SOX
is approaching key support between the 540 to 550 range. Should
it breakdown below that level of demand, the Nasdaq is very
likely to witness further downside.
On the bullish side of the coin Tuesday, shares of Cisco were
upgraded to a buy rating. UBS Warburg raised their rating and
price target on the networking king, noting stability in the
current quarter. Readers should note that Cisco is not entirely
leveraged to the telecom business because of its exposure to
enterprise, which is essentially every company other than telecom
that buys routers and other networking gear. Shares of Cisco
ended Monday with a fractional gain.
After Greenspan's repeat appearance Tuesday, market participants
will lend the remainder of the week to corporate earnings and
economic data in the form of second-quarter Gross Domestic
Product (GDP). Economists are forecasting that the U.S. economy
grew by a mere 0.8 percent annual rate during the second-quarter.
The GDP number is set for release Friday morning, before the
bell.
There are plenty of earnings reports throughout the week that
have the potential to move the market in one direction or
another. Copmanies announcing earnings this week include Lucent,
QLogic (NASDAQ:QLGC), JDS Uniphase (NASDAQ:JDSU), LSI Logic
(NYSE:LSI), Qualcomm (NASDAQ:QCOM), Verisign (NASDAQ:VRSN),
Worldcom (NASDAQ:WCOM) and Adolph Coors (NYSE:RKY). Alright,
maybe RKY won't move the market. They are headquartered just up
the street, though, and make a good brew.
The aforementioned companies have the potential to produce a
catalyst this week. Will that catalyst emerge as bearish or
bullish? Barring a major blow-up by Qualcomm, I think that
things in technology have grown so negative that at this point
any positive comment from the likes of Lucent or JDS Uniphase
would result in a short covering rally. No matter if it's
warranted or not, bears don't like being crowded. And when
they're crowded, they tend to cover.
It seems that fading the prevailing sentiment and direction in
the market continues to work. In other words, buying near
meaningful support levels and selling near meaningful resistance
levels. Of course, meaningful is subjective, and there's the
fact that the COMPX CLOSED below 2000 Monday. Then again, the
Market Volatility Index (VIX.X) continues to stick around 25.
Therefore, lonely may not be such a bad place. That is, if
you're a trader.
Eric Utley
Editor
Option Investor
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MARKET SENTIMENT
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Psychological Damage
By Jeffrey Canavan
A blow was dealt to the market psyche today when the Nasdaq
Composite closed below 2,000. Granted it's just a psychological
number, and there is technical support just below, but each dip
below this level runs the risk of spurring a selling spree. The
S&P 500 closing below 1,200 didn't help either.
Speaking of psychological levels, lets see where certain
sectors/indices stand in relation to their April to May gains.
Given Back Less Than 38.2%
Russell 2000, Banks, Insurance, Retail, Drugs, Healthcare, Paper
Products, Cyclical, Transports, REITs, and Midcaps
Given Back More Than 38.2%, but Less Than 50%
Dow Jones Industrial, Nasdaq Composite, S&P 100, Computers, and
Airlines
Given Back More Than 50%, but Less Than 61.8%
S&P 500, Nasdaq-100, Semiconductors, Biotechnology,
Telecommunications, Brokers, Chemicals, Gold
Given Back More than 61.8%
Software, Networking, Disk Drives, Internets, Oil, Oil Service,
Utilities
Today the Semiconductor and Biotechnology Indices were the
leading losers, and are now close to dropping into that "given
back more than 61.8%" category. The Pharmaceutical Index was
also a big loser today, down 2.21%, but is still safely above the
38.2% retracement level. The Airline Index continues to buck the
overall trend, and was one of the only sectors in positive
territory, up 0.27%. Oil Service stocks also got a boost after
reports of a possible reduction in output by OPEC. The QQQs are
flat after another round of earnings announcements, but tomorrow
could bring us closer to testing support rather than resistance.
*************************Sector Watch****************************
Weekly Daily Overbought Support Resistance
Trend Trend Oversold
DJIA Bearish Bearish Overbought 10,200 10,600
NASD Bearish Bearish Overbought 1,940 2,125
S&P 500 Bearish Bearish Overbought 1,170 1,240
Rus 2000 Bearish Neutral Overbought 465 500
Semis Bearish Bearish Overbought 525 585
Biotech Bearish Neutral Overbought 490 550
Internet Bearish Bearish Neutral 160 186
Networking Bearish Neutral Neutral 300 365
Software Bearish Bearish Neutral 180 210
Banking Neutral Bullish Overbought 625 670
Retail Neutral Bullish Overbought 875 920
Drugs Bearish Neutral Overbought 385 410
Percent Change
Last Last Last Relative Strength
5 Days 10 Days 30 Days vs S&P 500
DJIA - - - Positive
NASD (2.7%) (1.2%) (10.3%) Neutral
S&P 500 (0.9%) (0.6%) (5.8%) N/A
Rus 2000 (0.2%) (0.7%) (5.7%) Neutral
Semis (0.1%) (1.1%) (17.5%) Negative
Biotech 4.1% (8.3%) (18.7%) Negative
Internet (4.7%) (6.2%) (22.0%) Neutral
Networking 0.7% (1.2%) (21.9%) Neutral
Software (7.6%) (10.9%) (21.3%) Negative
Banking 0.8% 0.4% (0.5%) Positive
Retail 0.6% 6.8% (1.2%) Positive
Drugs 3.1% 0.6% (4.7%) Neutral
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**************
TRADERS CORNER
**************
Wealth Through Pattern Recognition
By Mark Phillips
Once or twice before I've referred to my background as an
engineer, and how many of my skills in that profession led me
headlong into the life of a trader. One of the abilities that
is key to both professions is the ability to recognize patterns
in seemingly unrelated, evenly apparently random events.
I was reminded of the elusiveness of this skill over the weekend
as I was cleaning house in preparation to move. I ran across
several posters and books filled with those 3-D Stare-E-O Grams
that were so popular several years ago. For those that don't
remember them, they were seemingly random black-and-white or
color patterns covering the entire page. If you stared long
enough and could deliberately blur your vision, a 3-dimensional
picture would appear, buried in all the noise.
The interesting thing about these pictures is that not everyone
could see them. After a bit of practice, I could get the
pictures to 'pop' into view in just a few seconds, while others
could stare for hours on end and accomplish nothing other than
acquire a splitting headache. I really don't think it was a
skill that one could develop. I never had to work at it -- it
just came naturally. At the same time, I had numerous friends
and acquaintances who finally gave up after endless hours of
fruitless staring.
As an engineer, I designed, built and maintained sophisticated
control systems. It was amazing how when a system abnormality
surfaced, the data seemed ragged and disjointed -- completely
unrelated to what I expected. But after studying the problem
for awhile, a pattern would begin to appear. Before long, not
only was there a clear pattern to the malfunction, but a
perfectly logical and usually simple solution materialized as
well. Just like the pictures I mentioned above, persistent
study produced a coherent picture that could be used for further
system enhancements.
So how does all this relate to life as a trader? Do you
remember the first time you saw a daily price chart - most
likely with Open-High-Low-Close bars? Did you see a pattern, or
did you see a jumble of lines that looked just a tad less
organized than an electro-cardiogram. Me, I saw a noisy mess.
I read and studied and stared at thousands of bar and candle
charts to no avail. While I could see the many different
patterns described in the examples in books (i.e. bear flags,
pennants, wedges, engulfing patterns, etc.), but I sure couldn't
see them on live charts as the action unfolded.
Then I found a book that opened my eyes to the possibilities
of Technical Analysis. It covered Fibonacci retracements,
Elliot Wave Theory, oscillators like MACD and Stochastics,
channel lines, support/resistance lines, moving averages and
much more. Although it took some time to work through it all,
I did so because I was convinced that there was a pattern hidden
in all this seemingly disparate information.
I could easily see overbought and oversold setups in the
oscillators, but couldn't seem to figure out which setups were
for real and which were deceptive. I could do the same thing
with support/resistance. Some moves through resistance would
result in a strong breakout, while others would fizzle almost
before they had begun. Then gradually, a pattern began to
appear. Winning trades from the Stochastics oscillator seemed
to occur with a favorable bounce from support/resistance.
Confirmation of two separate indicators made the overall
Buy/Sell signal stronger. And if we could also add in a
confirming Candle pattern along with an important retracement
level, we find that there are multiple indications all pointing
in the same direction.
Each separate technical indicator that confirms the initial
Sell or Buy signal makes it stronger, reinforcing the pattern.
So when we actually enter a trade with 5 different indicators
lined up saying to go Long, our odds are drastically improved.
The market is made up of a sea of individual traders, each of
whom bring their own particular biases to the marketplace.
Price charts and technical indicators are just a reliable way
to measure the pulse of this mass psychology. There is no
substitute for education and experience in the battle to pick
the winning trade for the day, week, month or year.
As traders, we earn our supper by being able to pick the winning
signals and reject those that are destined to fail. Now, if we
could pick all the winners, and reject all the losers, we would
all be very rich. But that isn't reality. What we need to do
is maximize our odds of success by only taking trades that
satisfy a predetermined pattern. First we determine the
individual patterns that are most likely to lead to success.
For instance, when daily Stochastics emerges from oversold, that
indicates a bullish move is afoot. But Stochastics only
register degrees of oversold/overbought to a maximum of 100%
and a minimum of 0%. So in a strongly trending market, these
signals can become less reliable. So maybe we would throw in
the ADX (Average Directional Movement) indicator, which measures
the strength of the trend, and only take Stochastics signals
when the ADX indicates the lack of a strong trend.
How about a breakout above resistance? Have you noticed that
the most reliable ones are accompanied by several days of
continuously strengthening volume? How about those retracement
levels? In a strong market, I've noticed that a stock will pull
back to the 38% or possibly the 50% retracement before resuming
the primary move, while the pullback in a weaker market almost
always comes back to the 62% retracement level.
I haven't covered any of these technical indications in great
detail, because that isn't the lesson I want to share. The
important lesson is that I have recognized certain patterns
through countless hours of study. I wish I could tell you that
there is a magic formula that would look at all these indicators
and spit out easy-to-use and flawless Buy and Sell instructions.
I spent many hundreds of hours pursuing just such a lofty goal,
programming endlessly. I feel pretty safe saying that animal
doesn't exist. Oh sure, we can use the computer to filter a
list of possibilities down to a manageable list, but we still
have to look at the individual charts, use the filter of
experience and apply our subjective judgment before committing
cash to the trade.
Which brings us back to pattern recognition. Once you can
recognize the many different technical patterns we talk about
here at Option Investor, the next step is to understand how it
should ideally unfold in the hours and days ahead. Then learn
to see the pattern on your own, trying to determine when it
will pan out and when it will fail. Next you'll see that
patterns are most likely to succeed when confirmed by other
complimentary patterns.
The quest for success as a trader demands that we each identify
the patterns that represent a high-odds trade for our trading
style. It can be simple or complex, but when we develop the
ability to see the patterns on our own, we have each taken a
huge leap forward along the path towards long-term trading
success.
Here's another way of looking at it. Through study and
research, we each build our own 3-D picture over a period of
months and years. While you may be the only one that can see
YOUR picture, it is a picture that you are comfortable with and
can see immediately when the lighting is just right. It doesn't
matter if nobody else can see your picture, because it wasn't
created for them. When your picture appears, you will know that
the high-odds trading setup you've been waiting for is here.
All the hard work has been done in advance, and now you can sit
back and reap the reward.
Happy Hunting!
Mark
*************
NEW CALL PLAY
*************
No new calls tonight
************
NEW PUT PLAY
************
No new puts tonight
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STOP-LOSS UPDATES
*****************
KOPN - call
Adjust from $11 up to $12
GILD - put
Adjust from $56.50 down to $56
PDII - put
Adjust from $73 down to $68
AES - put
Adjust from $37 down to $36
CIMA - put
Adjust from $65 down to $61
PDLI - put
Adjust from $63 down to $58
SGR - put
Adjust from $36.50 down to $34
NVDA - put
Adjust from $78 down to $73
DIGL - put
Adjust from $26 down to $24
************
DROPPED CALL
************
GMST $44.12 -2.28 (-2.28) Shares of GMST rebounded from our stop
at the $44 level. But their close below the 10-dma, currently
around $45.45, is most disconcerting. They haven't settled
below the 10-day for about two weeks. The bearish close Monday
may be a sign that the stock's set to retrace its gains,
bringing an end to our play. Use any strength towards the $45
level to exit open positions.
***********
DROPPED PUT
***********
No dropped puts tonight
*********************
PLAY OF THE DAY - PUT
*********************
SRNA - Serena Software $20.07 -0.78 (-0.78 last week)
Serena Software is a provider of eBusiness software change
management (SCM) solutions. The company's products and
services are used to manage and control software change for
organizations whose business operations are dependent on
managing information technology (IT). SRNA's product
offerings support the industry standard IBM mainframe
platforms, including MVS, and are marketed under the brand
name Full Cycle mainframe. This product suite automates the
software application life cycle and creates an IT environment
that facilitates concurrent development efforts by separate
programming teams, improves process consistency, enhances
software integrity and protects valuable software assets.
Most Recent Write-Up
A bit at a time, SRNA is heading towards a violation of the $20
support level, helped along by one negative earnings
announcement after another in the Software sector. With
bearish comments from MSFT and SEBL in recent days, it has made
for nice entries into the play over the past few days. Wait for
buyers to attempt a rally, and then enter the play as the stock
rolls over from a lower level than the last time. Resistance is
now sitting at $22 and then $23, and with the current negative
tone in the Software sector, entering near these levels should
continue to provide attractive entries in advance of the
company's August 16th earnings announcement. The Software index
(GSO.X) continues to deteriorate, falling through the $190 level
on Friday, helping to propel SRNA lower. Continued selling of
Software stocks will push the GSO index below the $180 level,
and this will likely coincide with SRNA falling below $20,
providing for additional entry points.
Comments
SRNA spiked through its pivotal $20 level Monday, which may be
a sign that further weakness lies ahead in its shares. Any
continued selling in the Nasdaq and software sector should drag
this stock below $20. Watch the GSO.X early Tuesday for
confirmation that the bears still have the upper-hand. On the
downside, target the $17.50 level.
BUY PUT AUG-22.5 NHU-TX OI=252 at $4.20 SL=2.50
BUY PUT AUG-20.0*NHU-TD OI=208 at $2.60 SL=1.25
Average Daily Volume = 726 K
*******************
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